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Properties are said to be a safe investment. But is that always the case?

In year 2018, an estimate of 30,000 or more properties have been put on auction in Malaysia.

Properties may be put on auction due to a number of reasons; the most common reason being persistent default in loan repayment resulting in the financier exercising its right to foreclose the property in order to recover the outstanding loan sum.

Properties placed on auction are fixed with reserve price equivalent to the market value. The reserve price will be reduced at each subsequent auction, normally by 10% based on the preceding reserved price.

This means that when you purchase a property through auction, you may be purchasing it at a price cheaper than the person who bought it through an open market.

Everyone likes a good deal such as shopping with attractive discounts on 11.11 and buying an auction property could be one of them. However, you may ask yourself “is such a purchase suitable for me?”.

One major reason why people shy away from purchasing properties through auction is due to the FEAR OF UNCERTAINTIES.

The uncertainties may consist of the followings: -

1. Unknown Condition: -

You may at times be caught by surprises as you may not enter the unit to view the conditions of the property before bidding.

2. Vacant Possession: -

The banks (as representative of the defaulters) are usually not responsible to deliver Vacant Possession of the auctioned property and it would be your responsibility to evict the occupier, if any.

3. Unknown Liabilities: -

You may be unaware of the outgoings (eg. quit rent, assessment, management fees, sewerage charges etc.) due by the defaulter before you bid for the property. As such, depending on the terms of the Proclamation of Sale (POS), you may be liable for these outgoings which you previously did not account for.

4. Strict Completion Period: -

The period to complete the sale (completion period) may be either 90 or 120 days. Unlike ordinary subsale or direct purchase from developer, there is no automatic extension of time and any extension of the completion period is purely at the bank (as representative of the defaulter)’s discretion.

Most of the uncertainties mentioned above may be resolved by investigating the property such as conducting a title search, understanding the terms of the POS, contacting the relevant parties and doing site visits. But it is always advisable to seek advice from solicitors or professionals who are well versed in the auction process before bidding for an auction property, as the saying goes “better safe than sorry”.

The possible situation which may arise in an auction property is best illustrated in the case study as shown below.

Case Study Conveyancing: Auction Properties

TEE BAN TIONG v RHB BANK BERHAD 

[2016] MLJU 1546 HIGH COURT (IPOH)

FACTS

The Plaintiff bought 2 adjoining shop lot (“the said properties”) through public auction sale and had obtained loan from the same bank which was the Absolute Assignee (Previous Owner’s Bank) of the defaulting assignor (Previous Owner), thinking that if both the Previous Owner’s Bank and the Plaintiff’s Bank is the same, it would help in expediting the completion of the auction sale. The Plaintiff paid 10% of the purchase price of RM260,000.00 amounting to RM26,000.00 to the solicitors for the Absolute Assignee and signed the Contract of Sales (“COS”).

Issue 1 - Strata Title Issued Upon Auction

The COS provides that the Plaintiff has 120 days to complete the purchase. However, after the conclusion of the public bid by the Plaintiff, it transpired that strata titles to the said properties had already been issued, wherein such a situation is not dealt with in the COS.

In such situation, in order for the Plaintiff’s Bank to release the balance purchase price, the Solicitors acting for the Plaintiff’s Bank had to ensure that all the documents creating a charge in favour of the Plaintiff’s Bank is properly executed before advising for the release of the loan sum.

Issue 2 - Developer in Liquidation

To complicate the matter further, the Developer in whose favour the strata titles were registered had gone into liquidation and the liquidator was reluctant to sign the transfer direct from the Developer in liquidation to the Plaintiff as the successful bidder unless the Plaintiff’s Bank would give some undertaking which the Plaintiff’s Bank is reluctant to do so.

As the auction process may not be completed within the 120 days period due to the above, 2 extensions of time were given which are subject to conditions, the second extension being subject to payment of interest at 6.75% Per Annum on the balance auction price.

In a separate matter, the Previous Owner sued the Previous Owner’s Bank together with the Plaintiff to seek Courts declaration that the COS between the Plaintiff and Previous Owner’s Bank to be null and void. The Court thereafter declared that the COS is valid on 1 October 2009, however, the COS was terminated by the Previous Owner’s Bank prior to the Court’s decision.

The Previous Owner’s Bank terminated the COS on 16 May 2007 and returned the 10% deposit to the Plaintiff, and the Plaintiff commenced action in the Sessions Court to claim for specific performance of the COS.

To compound the problem, prior to the settlement of Issue 4, the Previous Owner’s Bank has recognised the Previous Owner as the rightful owner of the said properties and had allowed the Previous Owner to redeem the said properties from the Previous Owner’s Bank on 30 September 2007.

In 2016, High Court allowed the appeal from the decision of the learned Sessions Court Judge with respect to the claim for specific performance of the COS by public auction and in lieu of that, damages to be assessed, however, as the Properties had been redeemed by the Previous Owner, the only remedy available to the Plaintiff is damages.

Conclusion

With proper research, uncertainties can be clarified, chances of facing unwanted surprises may be reduced and auction properties can be your best alternative to uncover hidden gems that have been neglected by many.

Article Contributed By:

Louis Ling Lee Hui

Advocate and Solicitor of Yi Leong & Co.

If you have any questions, kindly send an email to louisling.co@gmail.com. This column does not constitute legal advice and the views expressed here are the writer's own.

(Written by Louis Ling, 18th December 2019)